Walgreen Co. (WAG) is scheduled to release its fourth quarter and fiscal 2011 earnings on Tuesday, September 27, 2011, before the market opens.
The Zacks Consensus Estimates for the fourth quarter and fiscal 2011 earnings are pegged at 55 cents and $2.62 per share respectively.
Walgreen has already reported sales of $17.94 billion during the fourth quarter of fiscal 2011, up 6.4% compared with the year-ago period. Comparable store sales in the quarter increased 4.3%, while front-end comparable store sales were up by 4.7%. Total sales for fiscal 2011 (ending August 2011) increased 7% to $72.16 billion with a 3.3% rise in comparable store sales. At the end of August 2011, Walgreen operated 8,211 locations in all 50 states, including the District of Columbia, Puerto Rico and Guam.
Previous Quarter Highlights
Walgreen reported EPS of 65 cents in the third quarter of fiscal 2011, beating the Zacks Consensus Estimate of 62 cents and was 38.3% higher than the year-ago quarter. The year-ago quarter’s EPS included restructuring and restructuring-related costs of a penny per share associated with the company’s Rewiring for Growth initiative.
The third quarter of 2010 included a negative impact of 4 cents per share from the elimination of the tax benefit for the Medicare Part D subsidy for retiree benefits, 2 cents per share from costs associated with the Duane Reade acquisition and 1 cent per share toward costs associated with Rewiring for Growth.
Net sales during the quarter increased 6.8% year over year to $18.4 billion. Comparable store sales increased 4.1%, while front-end comparable drugstore sales were up 3.9%. Prescription sales, accounting for 65.1% of sales in the quarter, leaped 6.4%, while prescription sales in comparable stores increased by 4.1%. Moreover, the company also raised its retail pharmacy market share to 20.1%.
Agreement of analysts
Estimate revision trends among analysts clearly depict a neutral view for the company’s earnings in the fourth quarter. Over the last 30 days, out of the 15 analysts covering the stock, none revised their estimates in either direction. Fiscal 2011 estimates also followed a similar trend. Over the last 30 days, out of the 9 analysts covering the stock, none have changed their estimates.
There are a number of reasons for the neutral sentiment regarding Walgreen. Although the company reported encouraging sales for the fourth quarter, the analysts remain concerned based on the impact of the current high unemployment levels and lower discretionary spending. Moreover, the company faces intense competition from major players like CVS Caremark (CVS) and Rite Aid Corporation (RAD).
In addition, Walgreen decided not to renew its agreement with Express Scripts (ESRX) citing certain disagreements. With this move, effective January 1, 2012, Walgreen’s 7,700 pharmacies will not be a part of Express Scripts’ pharmacy provider network. Walgreen estimates that Express Scripts, as a pharmacy benefits manager, processes 90 million prescriptions that are not expected to be filled by Walgreen in fiscal 2012, representing approximately $5.3 billion in annual sales. Thus, the analysts believe the decision not to renew the contract will affect the company’s future growth.
We are also awaiting more update regarding the company’s sales trends, Customer-Centric Retailing (CCR) initiative and the progress on the Rewiring initiative. Presently Walgreen is set to tackle this year’s flu season with its new flu shot program. Under this program, Walgreen is offering immunizations across its 7,700 stores. This also includes all Duane Reade pharmacies in New York and more than 350 Take Care Clinics. The company also informed that flu shots (priced at $31.99 without insurance) will be available daily at its pharmacies for which no appointment would be necessary.
Magnitude of Estimate Revisions
The magnitude of revisions is moderate following the third quarter results. Overall, estimates for the fourth quarter were up from 54 cents to the current level of 55 cents per share in the last 90 days. For fiscal 2011, the Zacks Consensus Estimate remained unchanged at $2.62 per share as none of the analysts revised their estimates over the last 90 days.
Surprise
Walgreen has exceeded estimates in three of the last four quarters and remained in-line with one. The company has an average surprise of 10.34% over the trailing four quarters.
Our Recommendation
We are encouraged by Walgreen’s strategic decisions to align its assets with core strategies. These encompass several recent acquisitions including the take over of online retailer drugstore.com. and selling of its Pharmacy Benefit Management (PBM) business. Moreover, the company has made satisfactory progress with respect to the CCR rollout and meeting the targeted savings under the rewiring initiative. The benefits from these initiatives will be experienced over a period of time.
Walgreen currently retains a Zacks #4 Rank (short-term Sell rating), based on the present headwinds discussed earlier. However, we are encouraged by the company’s hard work toward establishing itself as a leading provider of pharmacy, health and wellness solutions and thus are confident about the longer term potentiality of the company. Presently, we remain ‘Neutral’ on the stock.
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